It is common for parents, relative, and even close friends to make a significant gift to their loved ones. In many occasions, these gifts are big sums of money, important assets such as land or cars, and are given in special life events such as weddings, the birth of a child, a first home purchase, and the like. But the most feared aspect of giving and receiving these types of gifts are taxes.
Two of the questions I get the most regarding gift taxes are:
- Will I be taxed on the money or asset I receive as a gift?
- Will I be taxed for giving money or assets?
And the answer is pretty straightforward for most cases: The recipient of a gift isn't liable for gift taxes. The giver is responsible for paying the gift tax, and they must complete and file Form 709 with the IRS if their gifts surpass the annual or lifetime gift limits, or if their gifts aren't exempt.
Let's look at this a bit more in depth.
Annual and Lifetime Gift Limits:
In general, the person receiving a gift typically does not have to pay gift tax. The giver, however, will generally file a gift tax return when the gift exceeds the annual gift tax exclusion amount, which is $15,000 per recipient for 2021.
On top of the $15,000 annual exclusion, there is an $11.58 million lifetime exclusion (in 2021, that rises to $11.7 million).
Regardless of whether you have exceeded your annual or lifetime limit, you must declare all gifts over the yearly limit amount. Taxable gifts that exceed the annual exclusion limit must be declared on Form 709 U.S. Gift (and Generation-Skipping Transfer) Tax Return.
To be more specific, let's clarify with a brief example: if a person gives (the giver) more than $15,000 in cash or assets (for example, stocks, land, a new car) in a year to any other person, the giver will need to file a gift tax return. However, that doesn’t mean the giver has to pay a gift tax. It just means the giver needs to file IRS Form 709 to disclose the gift. This means that while the giver does not exceeded their lifetime gift limit, the giver won’t have to pay gift tax.
What gifts are Exempt:
There is an unlimited marital deduction that covers gifts made to spouses who are U.S. citizens. This allows U.S. spouses to give and receive from and to each other as much as they like, either before or after your death, free of tax.
However, gifts made to a spouse who isn't a U.S. citizen are taxable. The threshold is $157,000 as of 2020, up from $155,000 in 2019. Gifts to non-U.S. spouses exceeding this amount are subject to the gift tax.
On the other hand, exempt gifts include tuition and medical expenses. You can pay someone's tuition or medical expenses without incurring the gift tax, as long as the payment is done directly to the institution or the care provider.
Lastly, gifts to charities and to political organizations are tax-exempt as well.
If you're uncertain whether the gifts you've made during the course of the year should be reported to the IRS on Form 709, or if you owe gift taxes, consult with a tax expert who can take into consideration all aspects of your specific circumstances, and guide you in the best direction.
If you need further assistance understanding your U.S. tax requirements and options, please don't hesitate to contact me for a consultation, I'd gladly help you sort your tax matters out, as well as filing your U.S. tax return from abroad.